Skewed workforce and a tepid economy: lessons from the US on higher ed debt

The US experience tells us imposing greater higher education debt on graduates can have significant effects on their consumption, their career choices, even when they get married, Bernard Keane and Glenn Dyer write.

The dramatic expansion of levels of student loan debt as a result of the Coalition’s higher education reform proposals may have significant negative macro-economic impacts, evidence from the United States shows.

Data from Universities Australia suggests students will take on, on average, a 29% higher debt to pay for higher education as the government slashes its funding of courses by 20% and deregulates tertiary fees. Combined with higher levels of interest, this means graduates will face debt increases of between 50% and 200% or more on what they currently face. Even conservative scenarios have graduates repaying twice as much for their HELP loans as would under current arrangements.

The total sum of money the reforms may end up affecting is substantial. In 2013, the value of HELP debts was expected to reach over $42 billion in 2016-17, meaning the total HELP debt could reach in excess of $80 billion, or 3-4% of the economy.

The issue is what people do when they have much higher education debts, and that is now the subject of extensive work in the United States, where the total student debt owed to the federal government and private lenders has been growing rapidly — around 12% a year, on average, for a decade, and unaffected by the financial crisis, which curbed other forms of debt — and is now, according to a paper for the New York Federal Reserve, around one trillion dollars, with the average balance around US$25,000. There’s now an increasing amount of data on how graduates with education debts respond as the size of those debts increases, which gives us some guidance on how Australian graduates will react.

Defaults will rise
Plainly, higher debt levels will mean more defaults. Currently around 17% of total HELP debt is classified as “doubtful debt” — graduates have gone overseas, or died, or gone bankrupt. The budget papers assume that 23% of new debt incurred in 2017-18 will not be repaid. The US has seen six successive years of rising defaults, and in 2012 one in 10 federal loan borrowers had defaulted within two years of commencing repayments, although there is some evidence delinquency rates have now stabilised, albeit at a level that sees student debt have the highest rate of default. Defaulting on student debt lowers individuals’ credit ratings, making it more difficult for them to borrow again in the future.

Consumption is constrained
Another logical consequence: the higher your debt burden, the less you consume. There’s also evidence that people with student debt need to rely on credit more than those without. Nor is this a problem confined to people in their 20s and 30s. While that demographic dominates debt holdings, a substantial number of Americans are now entering middle age with debt. Moreover, rising debt means parents and even grandparents taking on debt for their children, constraining their consumption as well.

Household formation
But there’s another, more worrying consequence of higher debt: your 20s and 30s are your prime period for forming a household as you meet a partner, live together and bear children, and higher debt constrains that. The Federal Reserve paper quotes US research:

“Each $10,000 in additional student debt decreases the borrower’s long-term probability of marriage by 7 percentage points. A 2010 poll found that 85% of college graduates were planning to move back home after graduation… high unemployment rates and low income of new graduates are the leading causes behind these survey results. But having large student loans can certainly make things worse…”

More recent data has confirmed this. In Australia rising student debt will add to the already established trend of children moving back home because they can’t afford to pay rent or buy a home in suburban Sydney or Melbourne. Over time that will have the capacity to restrain retail sales, home sales and associated consumption. The Fed paper notes “there is no doubt that reduced household formation has obviously hurt the recovery of the nation’s housing market… the home ownership rate of those under age 35 declined from its 2006 peak of 42.6% to 36.8% in the first quarter of 2012.”

Study and career choiceAnother consequence of imposing higher debt burdens is that it skews student course selection towards those leading to higher remuneration careers: teaching or social work become less popular compared to finance or consulting, which offer higher initial salaries. Under a scenario modelled by Universities Australia, nursing graduates who currently will repay a total of $24,000 debt would face repaying a total of over $66,000, significantly more than the current cost of courses for more remunerative occupations like engineering. Given health is already our biggest employer and will place increasing demands on our workforce as the population ages, that scenario is unlikely to produce optimal workforce planning outcomes.

The Education department’s view on all this — apart from the rising level of debt default — appears to be that it doesn’t matter, because student debt levels won’t increase that much. Competition between institutions will keep tuition costs down, departmental officials insisted at recent Estimates hearings — a claim exploded by Ross Gittins. Luckily for the government, it will be the best part of a decade before the evidence of lower consumption, less housing demand, higher default rates and avoidance of careers regarded as less remunerative will mount up. By that time, those responsible for yet another attack on younger Australians will be gone.

While HELP doubtful debt is a problem, the issue is expense to taxpayers and not defaults that affect the credit rating of debtors. In the Australian system loan repayment is income contingent via the tax system rather than fixed instalment (as it typically is in the US), meaning that here is no such thing as student loan default.

HELP debt may however occasionally contribute to individuals being unable to pay their tax liabilities by the due date, especially if they are outside the PAYG system(where deductions should be made by employers) and miscalculate their overall debt to the ATO. But that is true under the current system. Higher student debts in themselves have no effect on annual repayment obligations under the HELP system. Instead, they extend the number of years of repayment.

This current government problem is the long term consequences of what they do is not consider. The short term is what will keep then in power and that’s only what interests them. If it goes to pot to quickly, just blame someone else and hope they are believed by the voters. Worked this time!

Maybe it’s a generational thing - the next Tide of MPs that Time washes into Parliament may rediscover the amazing new idea of free education, pre-school, primary, secondary, tertiary.
Talk about a guaranteed blue chip investment for future national prosperity that would be!

The problem with your comparison is that there is little similarity between the Australian and American system. In America, you do take out the equivalent of a home loan for your degree - but even if degree’s did shoot up to $100k, you would only be paying an extra 2% tax each year when you earn more than $50k.
The bigger problem for students, young people and the economy in general is the lack of jobs AFTER uni. Education is only an investment if there is a change you’ll use it.

First, most tertiary education is really vocational training so why should users not pay?
Second, universities are incredibly high overhead operations. There are more modern, lower cost methods of vocational education that blend in-person contact with internet based information delivery.
Understanding there is unaddressed an overlap in some fields, I’m in favour of publicly funding research & higher thinking (ie academinc pursuits) more heavily and requiring the engineers, lawyers, doctors and IT boffins to pay their own way.

Maxcelcat - Assuming an equal payment every week for those 8 years, you were paying $68 a week or $3500 a year.
The maximum repayment rate was 6% pa of your taxable income, meaning you were earning a minimum average of $58k.
Yep, you couldn’t save a thing…